The SEC is aiding and abetting high frequency traders

The SEC needs to put the SEC on its list of entities to investigate when it comes to high frequency trading.

On Wednesday, The Wall Street Journalreported that a pair of recently released studies showed that the Securities and Exchange Commission is allowing high frequency traders to get sneak peaks at corporate financial fillings before the general public. The lag time between when the high frequency traders—or, more accurately, their computers—get the filings and the rest of the public is at most a minute, and often as little as 10 seconds. Still, the authors of the studies maintain that even a 10-second head start is a big advantage for the computer traders, who measure trade times in milliseconds.

One of the studies found that when good or bad news (so, really, news) got to high frequency traders before others, stock trading volumes in those shares tended to jump. According to the WSJ, the findings suggest the regulator’s own system is giving professional traders an edge over mom-and-pop investors. Ouch!

An SEC contractor charges direct subscribers about $1,500 a month to access this feed. “The SEC receives no fees from the EDGAR Public Dissemination System (PDS),” says a spokesperson for the regulator. “The SEC does not pay the contractor to run and maintain PDS, nor does the contractor pay the SEC to run and maintain PDS.”

The SEC says about 40 companies subscribe to this service, most of which are data services or websites that publish the information they get from the SEC, and then give access to the information to their own subscribers. One of the subscribers to this service is Morningstar.com, which runs a website geared to average investors. Another is the Washington Service, which has hedge fund clients, including one that uses “quantitative models to drive trading strategies,” which sounds like it could be high frequency trading, but it could also be a lot of other things.

The story is not all that different from a number that have come out about high frequency traders over the last year or so. HFT traders agree to pay for a service—like having their computers closer to an exchange’s servers, or a slightly shorter data line between Chicago and New York, or early looks at the consumer confidence report or press releases—that the rest of Wall Street, and perhaps the service provider itself, assumes is worthless. And that goes on for a while, until someone figures out that that small advantage is worth a lot, if you are a high frequency trader. Outrage and, at times, lawsuits, then ensue. Usually, the service provider is forced to stop providing the special access to the high frequency traders (which, like plenty of other special services in all fields, the high frequency traders are paying a high fee for) because it seems unfair.

The difference here is the entity handing out that advantage is the SEC, which is supposed to regulate the market, should know something about what would give the HFT firms an advantage and is charged with making sure markets are fair. So, on the face of it, this looks bad, not just for us individual investors trying to compete with high frequency traders, but also for the SEC.

However, SEC documents are typically hundreds of pages long and written in legalize. The most important financial information, earnings results, are typically released by companies in press releases long before they are filed with the SEC. It’s not typically information that computers can digest quickly. But there are exceptions. One study looked at filings of insider transactions—when executives trade in their own shares. That’s something that is first reported in SEC filings.

It’s not all that surprising that the SEC would be slow to realize that selling a service that was giving an unfair advantage to high frequency trading was a bad idea. Then again, I bet that the SEC was unaware it was actually handing out an advantage. But even the SEC should have realized that the optics of actively assisting HFT firms would be bad.

Still, the SEC has been helping HFT firms in less direct ways. Despite harsh speeches from SEC Chair Mary Jo White and a few fines, the regulator has been slow to curtail high frequency trading. The SEC knew about the issues in Michael Lewis’ Flash Boys, which contends that HFT has rigged the market against individual investors, long before the book came out. Many of Lewis’ sources went to the SEC with their information long before they started talking to the journalist.

The SEC’s response? “Meh.” That might not be just because the SEC is a weak regulator. It comes down to the differences between what Lewis and the SEC think is important. If your No. 1 care is that the market be a fair and a level playing field, then Lewis’ outrage seems on target. High frequency traders do have an advantage.

The SEC, though, seems more concerned about bringing down the cost of trading. And at least in the ways that are easy to measure—trading costs, or the spread between what buyers pay and sellers get—high frequency trading does appear to have lowered costs for the average investor.

Of course, that’s not the only way to measure fairness, but it seems like a reasonable one, and an achievable one. That’s different than Lewis’ fairly naive notion of fairness, which I guess is that the market should be a completely level playing field between even the most sophisticated of high speed computerized professional traders and a guy like me with a Vanguard account.

Someone is always going to have an advantage. Even if the SEC did distribute its filings to Average Joes and high-speed traders at the same time, their computers would still be able to trade far faster than regular investors like you and me could even blink. HFT firms trade in milliseconds. I haven’t made a single trade all year. High frequency traders invest millions of dollars for the technology to be able to take advantage of that single-minute lead. I pay nothing to get access to my Vanguard account.

But the general public is not going to understand that last part, which is really the heart of the SEC dilemma when it comes to figuring how it should regulate high frequency trading.

If you believe that lowering trading costs is the most important thing, and that HFT firms lower trading costs, helping HFT firms is probably the fairest thing you can do. Until, of course, the The Wall Street Journal or Michael Lewis finds out about it. Then you have to stop, and the SEC surely will, because, to the average investor, this is never going to seem fair.

Editor’s note: A previous version of this story incorrectly stated that the SEC provides a subscription service to a direct feed on corporate financial filings. In fact, the feed is provided by a contractor of the SEC. The regulator does not receive any remuneration from the contractor that operates this feed.

‘Flash Boys’ startup IEX is one step closer to becoming a new stock exchange

IEX, the super-fast trading platform that was the focus of Michael Lewis’ recent book, is one step closer to becoming a full-fledged stock market.

The upstart platform raised $75 million in a new round of financing that will be used to pursue registration as a U.S. national exchange and expand its brand reach, the company said Wednesday.

The investors included such luminaries as Netscape co-founder James Clark and casino billionaire Steve Wynn. Venture capital firms Spark Capital and Bain Capital Ventures as well as other investors including Massachusetts Mutual Life Insurance and Franklin Templeton also participated in the round.

Made famous in Lewis’s book “Flash Boys,” IEX was developed to compete against the larger banks and their speed advantage — what’s known as high-frequency trading. IEX combats opaque high-frequency trading by slowing down orders to dampen the predatory effects of high-frequency traders.

“Flash Boys” brought the issue to the forefront of financial conversation and raised concerns that the Wall Street giants are taking advantage of regular traders with their powerful algorithms and data connections. IEX touts itself as “dedicated to institutionalizing fairness” in the financial markets.

“Our intention from day one was to challenge the status quo by building a market that prioritizes the needs of traditional investors and issuer companies,” said Brad Katsuyama, CEO and co-founder of IEX, in a statement. “We are encouraged by our recent growth, which has been driven by both investors and their brokers.”

IEX has grown rapidly this year. Its daily trading volume has tripled since the first quarter and participant volume has exceeded 100 million shares per day.

Spark Capital’s Alex Finkelstein, a general partner at the firm, will join IEX Group’s board of directors as part of the financing and will help further scale-up the emerging stock exchange.

Nasdaq CEO: We have to confront brutal reality

When Robert Greifeld, 57, became Nasdaq’s chief in 2003, it ran one equity market in the U.S. Today, it owns and operates 26 markets globally for trading stocks, bonds, derivatives, and commodities; its technology runs 70 markets on six continents. Greifeld’s aggressive expansion has been necessary to keep Nasdaq OMX relevant in an industry being heavily disrupted by infotech and globalization. He talked recently with Fortune about high-frequency trading, U.S. competitiveness in capital markets, and more. Edited excerpts:

Fortune: There’s been a lot of controversy about high frequency trading, especially since Michael Lewis’s book Flash Boys was published. Bottom line, Lewis says the market is rigged. Is he right?

Robert Greifeld: He’s completely wrong. He spoke to very few people in the industry—it was remarkable how few people he spoke to. I characterize it as a drive-by. It was not a serious piece of work. The markets are working better than they ever have. Can they be improved? Of course they can. We work on that every day. But it’s important to note that the cost to transact in our market has declined by 90% over the last 20 years. That’s pretty impressive.

Individual investors read the book or hear about it, and they’re a little scared. What’s the most important thing for them to know about this topic?

The thing they should know is that our markets function incredibly well. They’re very deep and very liquid, and if an investor wants to buy or sell at the price they see on their screen, they have a unique opportunity to do that in a most rapid fashion. Contrary to what you might think, retail participation in the market has been on the increase since 2012 and that increase has continued into 2014. So you see increased engagement from retail investors in the markets.

America’s economic success was in part due to having capital markets that were arguably the world’s best at allocating capital to its best use. Do we still have that edge?

Beyond a doubt. In certain ways, our lead in capital markets has extended. Since 2012, we’ve had 80 companies from outside the U.S. come to the U.S. marketplace [to list]. Just this year, we had a number of high-profile wins. We had JD.com come to us from China and Markit come from the U.K. to list here. So we feel very good about the state of our capital markets.

It’s interesting how, with the data available, you can see the transaction costs in our market relative to other markets, developed and developing, and we lead. That’s a good thing.

Four years ago, we heard predictions that increased regulation, Dodd-Frank in particular, would discourage companies from doing IPOs and listing in the U.S., and that the advantage was going to shift. What has happened since then?

What you have to focus on is the Jobs Act. That was the first bipartisan deregulatory action that I’ve seen in the past decade. The Jobs Act has had a tremendous impact on the IPO market in the U.S., in particular with biotech companies. It shows that informed government action can really make a difference in commercial endeavors.

A recent Businessweek article detailed a cyberattack on Nasdaq in 2010. What was your reaction to the article?

There was information in that story that we were not aware of. The fact that [the attack] was fundamentally state-sponsored was a surprise. We always suspected that could be it because the level of attack was not something that two guys in their basement could do. But to see that we were targeted by a sovereign nation [Russia] is something that will take your breath away for a second. We’re accustomed to competing with other commercial enterprises, but to realize that you have a sovereign nation coming after your systems is an eye-opener.

I was somewhat surprised in that we had been engaged with the government since 2010. That engagement was with myself, some board members, and members of management. So we obviously, for whatever reason, were not told the full story.

Part of my reaction also is that it did happen in 2010, and so much has happened since then with cyber-security issues. It’s probably equivalent to dog years in terms of how we’ve progressed in the past four years. Any commercial endeavor is in a different state of preparedness and awareness than they were in 2010.

What have you done to increase security in the four years since?

I do want to compliment the government because they have helped us through the last four years, and it’s been, I think, a good relationship for them.

We had to come at it in three ways. First, our staffing has changed dramatically with respect to the number of people dedicated to cyber-security, and the experience level of those people has increased dramatically. Second, the vendor community has come up with a number of different and interesting products that are remarkably more effective than [what] existed back in 2010. We’ve been an active consumer of that. Third, operationally you just have that as a core part of your procedures. You’re basically cleansing your systems on a regular basis, so we do that.

The dominant point is that you can never rest. You can never get to a state of saying, “Okay, we are now protected.” The threat factors change on a regular and constant basis, so it’s definitely something that causes anxiety, and you’ve got to use that and funnel that anxiety in a positive way.

You started in the business of technology and capital markets 35 years ago, and I suspect you could not have imagined how it would change. What lessons do you draw from your career?

Plus I was an English major before I went to grad school. So you have to be agile because you really do not know what’s going to happen. As you get further along in your career, you get better at anticipating the change in the world, but you’re still not precise. The dominant skill is to say, “Okay, I’m going to take the world as it comes. I always want to see reality for reality.” People have their preexisting notions or biases in terms of what the world should look like. We always have to confront brutal reality. That could be a reality we like because it’s what we thought, but it could easily be, and most times is, a different reality than we perceived, and we have to be agile about responding to that.

BATS President William O’Brien quits exchange operator

BATS Global Markets, one of the country’s largest stock exchanges, said Tuesday that its president, William O’Brien, is stepping out of that role, effective immediately.

In a press release, BATS gave no reason for O’Brien’s departure, which results in CEO Joe Ratterman reassuming the dual President-CEO title at the Lenexa, Kansas-based exchange. Ratterman previously held both titles until the BATS board decided to split the roles two years ago following the exchange’s withdrawal of its initial public offering due to a trading glitch.

O’Brien assumed the role of president roughly six months ago after previously serving as CEO of New Jersey exchange Direct Edge, which merged with BATS earlier this year.

In April, O’Brien made headlines when he appeared on CNBC and engaged in a heated argument with Flash Boys author Michael Lewis and IEX co-founder Brad Katsuyama, who is the focus of Lewis’ best-selling book and an outspoken opponent of high-frequency trading. The debate, which centered on how Direct Edge priced its trades, resulted in BATS issuing a correction of statements made by O’Brien during the interview in which he claimed the exchange did not use slower feeds for pricing.

Senate panel backs high frequency trading, and gets nowhere

The United States Senate took on high frequency trading and lost, I guess. Well, it didn’t win.

On Tuesday, the Senate Banking Committee held a hearing on the controversial trading practice. The hearing featured a number of boldfaced Wall Street names, including hedge fund titan and sometime-high-frequency-trader Ken Griffin; Jeff Sprecher, the head of the company that owns the New York Stock Exchange; and Joe Ratterman, the CEO of BATS, the stock exchange that is one of the chief “bad guys” featured in Michael Lewis’ recent book on HFT.

All of them said that high frequency trading is good for the market and should not be banned. The hearing contained no information to refute those facts.

Even Senator Elizabeth Warren took a shot and missed. Warren asked Griffin, just for context, how profitable his high frequency trading fund was. Griffin said he didn’t have a high frequency trading fund, which is technically true. He’s got a tactical fund that used to be all about high frequency trading but now is bigger and does a bunch of things, only one of which is high frequency trading. So it’s not solely a high frequency fund. Question deflected.

Griffin said we need high frequency trading to keep prices of exchange traded funds fair and accurate. But there have been lots of instances in which ETFs have been mis-priced. And shouldn’t making sure ETFs work be the job of BlackRock or others who rake in billions of dollars a year on such products?

There were even some swipes at Michael Lewis and his recent book Flash Boys, which vilified HFT. Griffin said the author had never spoken to him. Sprecher in a backhanded compliment said he admired IEX, the trading venue whose head Brad Katsuyama comes across as the hero of Lewis’ book. “I very much appreciate the IEX exchange, they have four order types,” Sprecher said. “I would love to get to four order types. They also have less than 1% market share.” The market, Sprecher was saying, has spoken, and they don’t want IEX.

All of the participants called for more disclosure of the fees that brokerage firms collect when they decide where to send their clients orders. They all agreed that there are too many places where stocks can trade, creating a potential for investors to get ripped off or for another so-called flash crash.

In fact, there seems to be a growing consensus from law makers and regulators, who are likely being guided by people like Sprecher and Griffin, that the real problem with the market is complexity; not lightning-quick trading that may or may not be picking investors’ pockets. Both Griffin and Sprecher said dark pools should be subject to the same regulations that exchanges are subject to. Sprecher says he would like to eliminate the fees that traders and brokers are paid to trade at one exchange over another.

All of those changes sound reasonable. But people who are likely to benefit the most from those changes are people like Sprecher and Griffin. The NYSE and trading venues like Griffin’s have to pay those fees. And, of course, Sprecher would like to go back to the days in which the market was simpler. Back then, the NYSE handled 90% of the trading volume.

Dark pools were formed, with different rules, in part because institutional investors thought they were not getting a good deal on exchanges. And there are “fair” dark pools, like IEX. But as Sprecher pointed out, no one trades there.

Unmasking the father of high frequency trading

David Whitcomb answers his phone with a chipper hello. He’s been waiting for my call, or pretty much anyone else’s.

You’ve probably never heard of Whitcomb. Few have.

Whitcomb, a mild-mannered, slightly high-pitched 73-year old former finance professor, is quite possibly the father of high frequency trading, the lightening quick buying and selling of stocks that has been vilified in the recent Michael Lewis book Flash Boys.

The book sparked a pitched public debate — complete with a 60 Minutes segment with Lewis and daily coverage on CNBC — about whether high frequency trading was good for the market or if regular investors were being systematically ripped off. Lewis had come to the latter conclusion.

Others aren’t so sure. Arthur Levitt, the former SEC chair known for protecting individual investors, has been a consultant to a major HFT firm for a few years. He said there’s no evidence that the practice leaves average investors worse off. Last week, Securities and Exchange Commission chair Mary Jo White said regulators are looking closely at the issue. And the SEC is reportedly investigating a number of venues favored by HFT traders. But White also said she believed HFT has lowered the cost of trading for most individuals. The market, she said, was not rigged.

I had my doubts about the dangers of HFT as well. I started writing about and investigating HFT a few years ago, when I first heard the terms co-location and dark pools, two tools of the HFT trade. It all seemed sketchy and mildly unfair to the average investor, but I could never pinpoint how HFT caused any harm.

Shortly after the Lewis book came out, I started to look into how HFT got started. I figured finding the founder of the practice might shed some light on the motives of those who practiced it. My search led me to Whitcomb as the most likely father of the practice.

When I finally reach him, Whitcomb is happy to talk, and he isn’t shy about his legacy. He says he hasn’t read Lewis’ book. He sold his firm, Automated Trading Desk, and left it a few years ago. He’s no longer involved with HFT.

What he really wants to talk about is tennis racquets. That’s what he is working on these days. He’s developing a racquet with a much larger “sweet spot”–the part of the strings that gives the ball the most power and accuracy. He has a prototype, but its 2 ounces heavier than Whitcomb thinks it needs to be. A 10-ounce prototype should be ready later this month. He’s also working on a high-tech putter.

On HFT, Whitcomb had this to say: “The ability to trade electronically has dramatically reduced the cost of trading for everyone,” says Whitcomb.”I never saw any evidence of abuse.”

For a long time, Whitcomb was considered one of the leading academic experts in the structure of the stock market, back when the market was largely a chaotic hustle of hand gestures on the floor of the New York Stock Exchange. He joined the faculty at Rutgers in New Jersey in 1975 and stayed on as a professor until 1999. During that time, he was regularly tapped by the SEC to consult on market issues and gave speeches at conferences. In 1988, he founded ATD, which grew to 110 employees, handling more than 200 million shares a day by 2007. That year, he sold the firm to Citigroup C.

After that, Whitcomb vanished, at least from Wall Street. He surfaced briefly in 2012 as the lead plaintiff in a class action suit against Citi, saying the bank had concealed from him and other shareholders the toxic assets that had nearly caused the bank to go under. Citi settled the lawsuit for $600 million. Whitcomb released a statement that he was pleased and went silent again. His lawyers for the suit did not return calls seeking comment.

I’m not the first to try to nail down the origins of HFT. The world of high frequency trading is made up of a mix of small, secretive firms and the world’s largest banks–Goldman Sachs GS, Credit Suisse CS, and Bank of America BAC. None of them like to talk about HFT. A few years ago, CNBC listed a number of people who were major players in high frequency trading. Whitcomb is on the list, but so are a number of others, including Dave Cummings, the former options traded who started electronic stock exchange BATS, which is one of the major villains of Flash Boys.

David Whitcomb is barely mentioned in Dark Pools, Scott Patterson’s book on the pioneers of HFT, which came out in early 2012. Haim Bodek, a former Goldman Sachs trader who was prominently featured in Dark Pools, says Whitcomb’s ATD was never really a HFT firm, which typically try to make money by trading faster and ahead of other investors. That’s the type of HFT firm that Lewis wrote about, and the type that Bodek used to run and is now a critic of.

Instead, Bodek says ATD was more like a traditional market making firm, the kind that have always been part of the stock market, facilitating the buying and selling of stocks for others. A Citi spokesperson says ATD is not a high frequency trading firm and never was.

Whitcomb’s LinkedIn profile lists him as the current CEO of Revolutionary Tennis Innovations, which doesn’t have its own website.

Our conversation began with tennis. He doesn’t play much, but he has a court on his estate in Hawaii’s Big Island. (Along with the Hawaii estate, Whitcomb travels regularly around the world, and, at least he hopes, beyond. He’s bought two tickets on Virgin Galactic, for him and his wife.) He got the idea for the super racquet from a friend, a theoretical physicist. The idea is similar to what Prince did nearly 50 years ago, when it introduced a racquet with an oversized head. Whitcomb says his racquet, which is nearly a rectangle with curved corners, has a sweet spot that is four times as large as existing racquets. Just get the ball to touch the strings and you are good.

When it comes to high-frequency trading, Whitcomb isn’t bashful. “Automated trading desk was the first of the high frequency trading firms,” says Whitcomb. He’s looking to get credit. Last year, for a “where are they now” segment of Babson University’s alumni magazine, Whitcomb e-mailed in that he had founded a firm that was the “pioneer of high frequency stock trading.”

Whitcomb says the origins of HFT date back to the Black Monday stock market crash of 1987. Watching the sell off, he says he was surprised at how useless human market makers were during a panic. No one knew where the bottom was. Whitcomb was convinced that computers could do a better job of figuring out how low the market needed to go before people would start buying again.

So he set out along with some computer engineers to develop the first programs that would allow computers to trade on their own. And that’s what led him to HFT. By the fall of 1990, he had developed the first computer system that could continuously trade stocks on its own at a rate faster than any human. He tried to peddle the technology to big banks and trading firms. But when no one was interested, he launched ATD.

Whitcomb says ATD, at least while he was there, always had a HFT division that traded stocks for the firm’s own account, and not on behalf of customers. He says he just wasn’t very public about it. He says he didn’t want to scare off the firm’s brokerage clients, who might be concerned about a conflict of interest. So ATD got a reputation as just a market maker, which worked for the firm.

Whitcomb says ATD began co-locating its computers, another controversial HFT practice, at the New York Stock Exchange back in 2001. He says it dramatically increased the profits of the firm, but the faster access came with risks. And that’s how things are supposed to work on Wall Street. Take more risk and you will make more money, at times. Whitcomb says a computer trading error that lasted 52 seconds cost ATD millions of dollars in 2003. The market never found out about it. But had it gone on for another 20 seconds, ATD would have been out of business.

What’s more, he said by the time he left the business, nearly everyone was using some sort of HFT technology, or had access to it. ATD was selling its services to a number of institutional investors. These days, Whitcomb says, anyone who wants access to the same technology can get it. So he says he doesn’t understand those who complain about an uneven playing field in the market. And average individual investors are unaffected by HFT. Their orders are too small to spark the interest of the traders, who only make fractions of pennies on every stock they trade.

Whitcomb acknowledges that things may have changed since he left Wall Street, but he says he never saw any evidence of that HFT had any effect on stock prices in his time at ATD and doesn’t know why that would have changed. “The ability to trade electronically has dramatically reduced the cost of trading for everyone,” says Whitcomb.”I just can’t see how anyone who does Warren Buffett-like buy and hold investing would be disadvantaged by the existence of high frequency traders. If anything, they have benefitted.”

Report: IEX looking to raise money, apply to be full stock exchange

FORTUNE — IEX Group, the alternative exchange highlighted in Michael Lewis’ recent book “Flash Boys,” is reportedly seeking investment capital as part of a plan to become an accredited stock exchange.

That’s according to The Wall Street Journal, which cites anonymous sources close to the matter as saying IEX is in talks with various investors in the hopes of raising funding that would value the firm as high as $300 million. Meanwhile, CNBC cites its own anonymous source as saying IEX has not actively reached out to investors, though the firm has received interest, and the value of any deal is still up in the air.

Launched last October, IEX is a so-called dark pool operator that offers a venue for private trading where bids and sales are not published for public view. “Flash Boys” follows the creation of IEX by former Royal Bank of Canada traders Brad Katsuyama and Ronan Ryan, who suspected high-frequency traders of gaming the stock market.

Should IEX successfully raise capital, the firm would have stronger footing as it moves forward with plans to apply for full-fledged stock exchange status with the U.S. Securities and Exchange Commission, according to WSJ.

IEX, which handled on average 0.44% of stock trades in the U.S. last month, says it hopes to “provide a more balanced marketplace” by delaying trades and limiting the types of trades it allows. An IEX spokesman could not be reached for comment.

In the quest for talent, why Silicon Valley could trump Wall Street

FORTUNE – In a post-financial crisis world, it’s easy to hate on Wall Street. But what I’ve been looking for is a rational explanation — what exactly has gone so very wrong over there?

In Michael Lewis’ new book, Flash Boys, the author provides the most compelling answer I have found – much of Wall Street suffers from a complete and utter lack of mission. The book provides a powerful cultural critique.

John Doerr, one of venture capital’s legends, has a memorable saying: He only backs entrepreneurs who are “missionaries” not “mercenaries”. This is a key part of his investment thesis.

The difference? Mercenaries are in it for themselves (usually money). Missionaries are in it to change the world around them for the better.

The Bay Area is chock full of mission-driven companies. It’s easy to satirize Silicon Valley’s over-earnest desire to ‘change the world’. It’s also fair to ask if the desire is disingenuous, since ‘change’ doesn’t necessarily imply ‘for the better’. But the real question is, does a company’s mission actually matter?

One clear way a mission pays off is in helping a company recruit top talent. Despite public perception of how easy it is to win at startups in Silicon Valley, there is not a monetarily rational reason for the accelerating brain drain of some of our most educated, financially well-positioned future executives from Wall Street to Silicon Valley.

Employee compensation at Google GOOG (including stock grants) averages about $190,000 at a year while at Goldman Sachs GS it’s north of $500,000. The odds of striking it rich at an early stage startup are amazingly low. For talented money-seekers, Wall Street remains a relative sure thing compared to the risks of a startup.

But after reading Flash Boys, the trends we’ve being seeing lately at some of the nation’s top business schools makes perfect sense. At the University of Pennsylvania’s Wharton School, for instance, the percentage of MBAs entering investment banking dropped to 13.3% last year from 26% in 2006. During the same period, those entering tech more than doubled to 11.1%.

It’s easy to see why Wall Street could lose talent to Silicon Valley. Who would want to work in an industry where the only acceptable answer to the question “Why?” is “for money.” Past a certain threshold of earnings it makes rational sense to optimize for more than just money. Another way to look at this: Picture two recent MBAs at Thanksgiving dinner. One works for Google, bringing self-driving cars to the market; the other works at Goldman. Who is going to talk proudly about their job, and who is going to sheepishly avoid the subject?

A company mission provides a purpose; it forms a connection between a company and their customer. Missions make companies worth working for. The most successful Silicon Valley companies almost universally exude a sense of mission (think Apple AAPL, Salesforce.com CRM and Google), while the vulnerable incumbents have lost their sense of purpose (think HP HPQ and Microsoft). Microsoft resoundingly achieved their mission of ‘a new computer in every home,’ but must now find a new calling to stay relevant.

In the absence of mission, companies devolve into uninspiring backwaters with no purpose and little connection with their customers. They become the kind of companies that would screw over their customer to make profit in the short term at the expense of everything and everyone else. In the fullness of time, and provided an even playing field, I believe all mercenary companies will be out-competed by missionaries.

There is hope for Wall Street. The story in Flash Boys centers on the improbable founding of the stock exchange IEX. Brad Katsuyama founded IEX with the mission to bring transparency and accountability back to the stock market. The team overflows with Silicon Valley’s brand of tech-startup missionary zeal. Flash Boys tells what happens when their business and mission collides solidly with Wall Street’s mercenary culture. It’s an amazing story.

IEX’s journey is an improbable one. Their odds are no better than the average startup. I’d bet on them though, IEX has a powerful mission.

Zachary Rosen is co-founder and CEO of Pantheon, a San Francisco-based company whose professional website platform lets developers, marketers, and IT users build, launch, and run all their Drupal & WordPress websites. Follow him @zack.